From Morningstar Equity Research:
Investors had every reason to be hesitant in entering the third quarter of 2020, but economic conditions have proved more favorable than widely expected. In particular, housing markets proved exceptionally robust. Existing-home sales surged toward the end of the summer, giving builders confidence and supporting 11% growth in new-home starts during the third quarter.
We expect the momentum to continue through the fourth quarter and into 2021, but some dynamics will change. Affluent buyers have driven the surge in housing in 2020. Sales growth in housing categories from $500,000-$1 million-plus accounts for over half of incremental purchase volumes in the third quarter. For most buyers, those prices remain out of reach.
As more companies have approved indefinite remote-work policies, we suspect wealthier renters could be heading for the suburbs. However, we don't see this as a sustainable source of housing demand in the long run.
In 2021, our outlook depends on demographic trends. Supply constraints are likely to put a limit on additional growth in new-home starts. Skilled construction labor remains scarce, land availability is constrained, and rising input costs raise the risk of putting home prices out of reach for most buyers. Between these factors limiting the flow of new homes, and extremely low existing-home inventories, the supply side will be the limiting factor.
We expect 1.345 million new-home starts in 2021. Affluent purchasers will move to the background, while middle-class buyers will move to the fore. Vaccines on the horizon suggest a return to full-time schooling, returning a wider swath of men and women to the workforce. This should bolster the economy overall, especially those who have struggled to make ends meet during 2020. As these folks get back on their feet, we expect a growing appetite for housing.
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